I have had comments from readers what other things I have been accumulating in my long-term file – with reference to my previous blog. As I skim through the file two pieces stand out.
U.S. Housing Market
The graph below charts the U.S. Existing Home Sales – Left Hand Scale with the U.S. Housing Starts – right hand scale.
The U.S. is 4 years into their housing price deflation. Believe it or not house prices, in general, are up 1.4% year to date, with housing starts trailing household formation by more than 50% for 4 years, with inventories more balanced. This period was brutal for the American homeowner however I believe we are seeing signs of mean-reversion and the market coming into balance. Market Strategists like to point out a huge supply of foreclosed homes still on the market, which I will concede, however these homes, which I have seen or been told about are NOT livable in their current state and have to be torn down or renovated.
Also, anecdotally I have a friend who runs a distressed real estate fund trying to buy distressed properties along the Atlantic coast of Florida. They purchased some pieces for their portfolio but they now have “given up” as prices have escalated and lack of properties have diminished opportunities on the Atlantic side of Florida and are now searching on the Gulf side.
Housing does represent about 8% of the U.S. economy and if this sector at least stabilizes – instead of being negative – this will boost the U.S. economy as a whole.
Equities Yield relative to Fixed Income Yield
The chart below highlights the spread between the U.S. 10 – Year Bonds yields with the S&P 500 Dividend Yield. For instance the 10 year U.S. Treasury yields 1.61% versus the dividend yield on the S&P 500 at 2.15%, representing a 54 basis point advantage. This chart goes back to 1956 and as one can see we haven’t seen this spread since the 1950’s or 56 years.
In Canada, the S&P/TSX dividend yield of $3.2% is 137 basis points above the 10-year Canadian bonds, also one of the highest spreads in almost 60 years.
I know these factoids have nothing to do with Model Price, or our Model Price Charts. But I do look around for long-term secular historical facts that can support what I am seeing in the Model Price world. In order to have a bull market, we need to start from a point of undervaluation where invest themes come together to support increased valuation to overvaluation. The puzzle isn’t complete as yet, as I have warned in my previous blog but conditions are slowly moving into place for a bull market in U.S. equities. For now, my long-term file just keeps on getting fatter!